Independent contractors come with pros, cons

September 24, 2012

Many small businesses start out as a sole proprietorship with no employees. However, many find they will need some help pretty quickly. If that time is now for some of you, make sure you know the difference between an employee and an independent contractor.

SAN ANGELO, Texas — Many small businesses start out as a sole proprietorship with no employees.

However, many find they will need some help pretty quickly. If that time is now for some of you, make sure you know the difference between an employee and an independent contractor.

What is an independent contractor (IC)? An IC is considered to be in business for themselves. Other terms could be used, such as freelancers, consultants or entrepreneurs. The really important thing a small business owner should keep in mind is that independent contractors don’t have the same legal status as employees.

When deciding whether to hire an employee remember that ICs are treated differently from a tax standpoint. With ICs employers pay lower taxes, and this appears very attractive to a small-business owner.

However, you should know that if you wrongly hire an employee as an IC, you may be required to pay hefty fees, as well as reimbursing them for wages that should have been paid under the Fair Labor Standards Act. You will also have to pay the government all of the back taxes that were due on a federal and or state level as well as Social Security, Medicare and unemployment.

The IRS provides information to help small business owners determine whether their workers are employees or ICs. Your accountant or attorney could assist you as well.

How much control does the worker have over how their job is done? Employees are typically controlled by employers in terms of when, where and how they work, what equipment they use and what training needs to be completed to do the job. ICs use their own tools, set their own hours and decide what method they use to complete the task.

If your small business controls how a worker is paid, whether expenses are reimbursed and whether they can seek business opportunities, they are likely to be an employee rather than a contractor. ICs can advertise freely, take on several jobs and set their own prices.

If a job done by a worker is a key aspect of the business and it is expected the relationship will continue indefinitely, they are an employee. Businesses that hire ICs expect the relationship will end when the job is completed.

Cost savings are probably the most compelling reason to hire an IC, as long as the position meets all of the IRS requirements. When hiring a contractor, you won’t have to pay employee benefits, office space, equipment, insurance or payroll taxes. Using a contractor reduces liability to a business owner, who will not be as vulnerable to being sued for job discrimination or wrongful termination.

When hiring a contractor, you can choose from among those who are most skilled in a given area. This also means training will be less likely and the contractor can start producing and contributing immediately.

Because ICs are in business for themselves, they are likely to have multiple jobs going at one time. This means your job may not always be their priority. When ICs are used, there should be an understanding they will depart when the work is complete. This could create problems because your workforce is constantly changing, which can be disruptive.

Although hiring ICs can save a small business money, contractors with specialized skills could charge higher fees than you would pay an employee to do the same job.

“Business Tips” was written by Paul Howard, business development specialist and certified business adviser IV of Angelo State University’s Small Business Development Center. Contact him at Paul.Howard@angelo.edu.